How Best to Pay Off Family Home Debt?
Unless you are among the really ambitious ‘near 2%’ of the property investors, you are not planning to buy off Disneyland yet. May be you can call yourself a conservative, moderate-stanced investor who wants to wrap up the debt on the family home with a part of the money earned over a lifetime. And the third choice is that you may fall somewhere in between? Where exactly?
For the none-too-ambitious, none-too-conservative investors
Alright! Let us say you fall in a non-conservative, non-ambitious terrain where you do not want a yacht or a luxury cruise for yourself but certainly want to pay your debt in double or triple quick time and also consider a decent portfolio expansion. This article, my dear friends, is for you….just your fraternity.
How best to pay your family home debt with your investments
So let me start with how to exit the situation of debt. Let us use a hypothetical situation of a property investor who has three properties altogether, including his family home. For the ease of calculation, let us consider all his properties are valued at $1,000,000. Now, how much practical sense can there ever be in clearing the mortgage of the family home with money earned over a lifetime?
Keep the properties till the end of the growth cycle
Instead, what an investor should ideally do is to carry his investment properties to the other side of the growth cycle. Anyhow! This will ensure that he gets to sell his properties at double the price he had bought for (at least). I am assuming that the length of the cycle was something like 8-10 years. Now, because he has held the properties for a period in excess of 12 months, 25% instead of 50% CGT will apply in his case.
Pay CGT, pay off family debt and you still get something to spare
So, even if he sells both his investment properties- cumulatively priced at $2,000,000- for $4,000,000 and pays a CGT of $500,000 (25% of the profit) on them, he will still have $1,500,000 profit to show. This means, he can clear the entire loan on the family home and still have something to spare, a good deal to spare if you look at it.
Got the idea!
How do you use home equity?